Confused consumers threaten stocks and recovery

Commentary: Expect slow growth for up to two years

While I remain long-term bullish on both stocks and the broader economy, data this week reminded us of an ugly risk to the recovery.

Namely, the American consumer.

U.S. retail sales rose just 0.4% in June and a meager 0.1% when you back out auto sales, both numbers significantly below forecasts. Not good.

The numbers were as baffling as they were disappointing, too. After all, consumer confidence hit a five-year high in June, according to the Conference Board. So how does this make sense?

Reuters

Will the economic recovery include consumers or be limited to corporations?

The conflicting data recently and the disappointing spending numbers longer term hint at a serious risk for stocks in the second half of the year. And while there is certainly no reason to panic just yet, investors better start paying attention — especially if they have big exposure to discretionary sectors in their portfolio.

The dilemma facing traders is whether they want to believe in a broader economic rebound that will ultimately include consumers, or if the rally thus far is limited mainly to corporate balance sheets and real estate prices for now.

The former is a virtuous cycle, with increased spending leading to increased profits and then increased hiring and wage growth. The latter is built on a slow grind in the “new normal” where gains are made through efficiencies — consumers making do with stagnant wages, corporations cutting costs and keeping staffing lean, housing focusing on keeping inventories scarce to support prices, and so on.

To me, it seems increasingly clear that we are stuck in a slow grind of recovery. Here’s why:

GDP

Unemployment

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The unemployment rate is 7.6% — down a measly 20 basis points from an official reading of 7.8% for September 2012. Jobs are being created, yes, but we are basically at the replacement rate as more jobseekers enter the workforce either as recent grads or out-of-work Americans actively looking for work again.

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